South Korean stocks sank more than 2 percent Tuesday as Israel warned of a retaliation over Iran's drone and missile attack over the weekend. The Korean won also fell sharply against the US dollar.

The benchmark Korea Composite Stock Price Index plunged 60.8 points, or 2.28 percent, to close at 2,609.63.

Trade volume was moderate at 557 million shares worth 11.9 trillion won ($8.48 billion), with decliners outpacing gainers 771 to 124.

Foreigners offloaded a net 272 billion won, while individuals scooped up a net 549 billion won. Institutions sold a net 293 billion won.

Tensions continued to escalate in the Middle East after Israel warned of retaliation against Iran's drone and missile attack Saturday.

Analysts said the market could experience increased volatility if the instability in the Middle East continues to widen, particularly given South Korea's heavy reliance on energy imports.

"While the possibility over Israel's retaliation against Iran may lead to volatility in the oil price, the upward momentum is currently limited as Western countries, including the United States, are against the expansion of the conflict," said Kim Dae-jun, a researcher at Korea Investment & Securities Co.

Top cap Samsung Electronics nose-dived 2.68 percent to 80,000 won, and major chipmaker SK hynix tumbled 4.84 percent to 179,100 won.

Battery makers also lost ground tracking losses from US electric car giant Tesla, with industry leader LG Energy Solution dipping 1.88 percent to 366,000 won and Samsung SDI plunging 1.9 percent to 386,500 won.

Air carriers closed bearish amid the geopolitical tension as well, with Korean Air Lines falling 1.58 percent to 19,980 won and Asiana Airlines decreasing 0.29 percent to 10,440 won. Jeju Air lost 2.31 percent to 10,550 won.

The local currency ended at 1,394.5 won against the greenback, down 10.5 won from the previous session's close. During the session, the rate reached the 1,400-won level for the first time since November 2022.

South Korea's currency authorities warned of the won's sharp decline against the US dollar and that one-sided movement is "not desirable" for the Korean economy.

"As investors avoid risks amid the escalating geopolitical tension, we need to brace for more overshooting," said Moon Da-woon, a researcher at Korea Investment & Securities, suggesting the rate may reach 1,440 won should the conflict expand further. (Yonhap)